WHAT IS PROPERTY DEVELOPMENT FINANCE?

Property development finance entails a short-term loan specifically designed for residential property development ventures, including construction projects. These loans are often between 4 months to 2 years. Typically, this type of financing comprises two components: a loan for land acquisition and subsequent stage payments to cover development expenses, such as property conversions into flats or HMOs.

In this guide, we’ll cover all you need to know about Property Development Finance:

How Development Finance Works
Types of Development Finance
Why apply for Development Finance?
What constitutes an Acceptable Project?
Who is Eligible?
How Much Can You Borrow?
Property Finance Rates and Fees
How to Find the Best Development Finance Lender
Have any Questions?

How Development Finance Works

Development finance often unfolds in a two-part structure: to fund the purchase of a site and to fund the building or development of it.

Purchase of the Site

The initial part of development financing is dedicated to the acquisition of the development site. This could include purchasing land for the construction of new properties or acquiring an existing property for refurbishment. This phase kickstarts the financial underpinning and provides developers with the capital needed to secure the basis for their development vision.

Funding the Build

The second pivotal stage revolves around funding the actual construction process. This part of the loan is disbursed in stages, often aligning with the progress of the development project. Rather than receiving the entire sum upfront, developers receive funds at specific intervals, often on a monthly basis or in line with construction milestones.

Valuing Development Finance Projects

As many development properties do not exist at the time a borrower applies for a loan or will be dramatically different upon completion, a few metrics are used to calculate the cost of building the property and the value of the property upon completion. Loan to Cost (LTC) gauges the loan size in comparison to the comprehensive project costs, spanning both land acquisition and construction expenses. Simultaneously, Loan to Gross Development Value (LTGDV) evaluates the loan against the anticipated value of the property upon project completion. These metrics, alongside a borrower’s credit history, development track record and capacity to pay the loan, form the basis of a lender’s evaluation process.

Types of Development Finance

Development Finance facilities can vary greatly and with them, the appropriate type of development finance loan varies to suit. Here are some examples of types of development finance:

Construction Finance

For those looking to build new properties or developments from the ground up, construction finance provides the necessary capital for every stage of the project. From land acquisition to project completion, this financing option ensures seamless progress and efficient use of funds.

Refurbishment Finance

Renovating existing properties to enhance their value? Refurbishment finance supports property upgrades, renovations, and improvements. Whether it’s a residential property, commercial space, or mixed-use development, this finance streamlines your refurbishment plans.

Conversion Finance

Converting properties from one use to another, such as turning office space into residential units or transforming a warehouse into a creative hub, requires specific funding. Conversion finance caters to these projects, ensuring smooth transitions and optimised financial support.

Development Finance

For those focused on unlocking the potential of land by obtaining planning permission for new developments, land development finance provides the necessary capital. It covers the costs associated with obtaining approvals, infrastructure development and preparing the land for construction.

Why Apply For Development Finance?

Development finance offers a range of advantages for property developers seeking to fund their endeavours. Here are key reasons to consider applying for development finance:

Funding the Full Project Lifecycle

Development finance covers various stages of a project, from land acquisition to construction and completion. Unlike traditional mortgages, which focus on existing properties, development finance caters to the dynamic needs of new builds, renovations, or conversions.

Flexible Payment Structures

This financing option often provides flexibility in payment structures. Payments may be released in stages, aligning with project milestones, reducing the financial burden during initial phases and allowing efficient cash flow management.

Tailored to Your Project

Development finance is not a one-size-fits-all solution. Lenders tailor loans to the specific requirements of your project, whether it’s residential, commercial, refurbishment, or new builds. This approach ensures that you get the financial support that will guide your project to success.

Interest Capitalisation

To ease cash flow during the construction phase, development finance often allows for interest to be capitalised. This means that rather than making monthly interest payments, the interest is added to the loan balance and repaid upon project completion or refinancing.

Accessibility for Varied Experience Levels

Whether you are an experienced developer or a first-timer, development finance can be accessible.
In the world of property development, leveraging the benefits of development finance can help you to complete your projects successfully. The tailored financial support and flexibility offered by development finance make it a strategic choice for developers looking to navigate the complexities of real estate development.

What constitutes an Acceptable Project?

We assess and consider property development or refurbishment projects primarily focused on residential properties as the end product. This could involve the purchase of a property intended for conversion into flats, bedsits, or HMOs, as well as new apartment or housing developments. We also evaluate the commercial viability of projects. The could include a variety of factors such as market demand, locational appeal or the feasibility of the proposed development. When considering an acceptable project, we often also look at other influences such as whether land is with, or without, planning. All of the above factors will influence whether your project is an acceptable development or not.

Who is Eligible?

While having project-related experience can bolster your application, it is not always a prerequisite if you have a skilled professional team in place to oversee the project’s execution. We understand that everyone starts somewhere, and first-time developers are welcome to apply. Our eligibility criteria consider factors such as a clear project plan, realistic budgeting, and a comprehensive understanding of the proposed development. Whether you’re an experienced developer or venturing into property development for the first time, we strive to tailor our financing solutions to match your unique needs and aspirations

How Much Can You Borrow?

Different lenders will service different sized development loans. At BiG Property Finance, we consider development facilities from £150,000 to £5,000,000. BiG will provide a facility of up to 78% of the cost of the project and up to 65% of the Gross Development value. See our rates and fees below for more.

Please note: These figures represent our best development finance rates, if you would like to find out more, call us today.

Property Finance Rates and Fees

Property Development Finance interest rates from 1.10% per month (subject to experience; location; loan to cost)
Arrangement Fee from 1% of the facility.
A Valuation Report for the land value; gross development value and build costs will be instructed by BiG and the cost will be paid for by the borrower.
The borrower will be responsible for our legal costs in setting up the loan, circa £1,200 to £2,500 depending on the property and loan structure.
A small fee of circa £250-£300 per release of charge will be payable to our solicitor on exit.
A Monitoring Surveyor will be appointed to issue certificates for the value of works against which BiG will release payments. Circa £400 per certificate.

How To Find The Best Development Finance Lender

Choosing the right development finance lender is crucial for the success of your project. Lenders can vary widely, including traditional banks, specialised property lenders, or even individual investors. The key is to align your project with the specific lending criteria each provider offers. Consider factors such as loan amounts, interest rates, and repayment terms. If you’d like personalised assistance or want to explore the financing options tailored to your project, feel free to contact us for expert guidance.